Many clients opt to form an LLC within their self directed IRA so they can manage their retirement investments themselves and avoid custodial fees that obstruct this process. This gives them greater “checkbook control” of their IRA assets without incurring excessive charges from an IRA custodian.
Use an LLC within your SDIRA to invest in real estate, private equity or other non-traditional investments such as cryptocurrency. Be wary of prohibited transactions which could lead to tax-deferred privileges being forfeited and potentially result in taxable income or the cancellation of tax-deferred status.
The IRA Owner
Self-directed IRA LLCs allow their owners to have “checkbook control” over their retirement funds without incurring exorbitant custodian fees and be subjected to custodial decisions that limit or change investment decisions or incur excessive charges. Furthermore, this structure also provides the IRA owner the option of investing in alternative assets like real estate or private equity investments.
Utilizing an LLC as part of their self-directed IRA portfolio can assist the owner with complying with self-directed IRA rules regarding prohibited transactions. An IRA LLC cannot be owned by anyone considered disqualified to own one1.
An LLC gives IRA owners access to business bank accounts that will facilitate faster financial action. Furthermore, an EIN will be obtained for their LLC which will create greater asset protection in case of litigation or bankruptcy proceedings.
The IRA Manager
Those utilizing self-directed IRAs for nontraditional assets or alternative investments often prefer setting up a single-member LLC as the investment entity, as this creates a simpler process and reduces back and forth with their custodian regarding instructions, expenses and contracts. Furthermore, an LLC business checking account gives them “checkbook control”.
LLC structures can be utilized for most investment activities approved by the IRS; however, certain investments such as collectibles (artwork, stamps and jewelry), life insurance and certain investments prohibited under IRA regulations may not qualify as investments. It is wise to consult an attorney who specializes in IRA law when setting up LLCs for investing purposes as the documents must be tailored specifically for that IRA/LLC structure. Furthermore, an EIN number will need to be acquired so it can operate as an independent legal entity for tax purposes and an operating agreement that prevents disqualified individuals from receiving salary or compensation from their LLC investments.
The IRA Custodian
LLC structures are often essential when purchasing alternative investments such as real estate through an IRA account, to protect personal assets from being attacked or sued due to any investment activities of an IRA account holder.
When creating an IRA LLC, its custodian must be informed of all investments within. This is accomplished by submitting its EIN number to the IRS; this helps verify their existence, identity and tax treatment.
An IRA LLC allows its account holder greater “checkbook control” over their retirement funds, enabling them to invest as opportunities arise without waiting for their custodian to cut a check. This can save both time and money in many situations; however it’s essential that any prohibited transactions be avoided as these could incur taxes and penalties upon account holder; hence it is imperative that use an experienced self-directed IRA custodian like STRATA with knowledge of alternative investments is utilized as the custodian.
The IRA Advisor
Most Self-Directed IRA investors utilize an LLC when investing in alternative investments like Real Estate and Private Equity. Most often, an IRA account owner owns the LLC while others may participate as joint venturers – when this occurs it’s essential that advisors understand all relevant rules regarding commingling of funds and prohibited transactions.
Real estate investors often opt for the IRA/LLC structure as it allows them to own properties directly without going through custodians for each transaction, giving signing rights over contracts and access to an LLC bank account, making funding transactions simpler.
As long as an investment meets specific criteria, most IRA/LLC investments do not require review by an administrator. When lending money or investing directly into private businesses such as notes or shares in privately-held companies through Self-Directed IRAs is desired, however, an immediate review must take place which usually occurs within 24 hours after submission of documentation and can take up to 3-5 days depending on your chosen administrator.